Page 259 - A Canuck's Guide to Financial Literacy 2020

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Currency Swap

A currency swap involves when two or more companies exchange principal and interest
payments, denominated in different currencies. Currency swaps are a popular way for
companies to obtain financing at a lower interest rate in a country that they're looking to do
business in. Local companies are known to obtain lower and better financing in comparison
to international companies.

For example, a US company is looking to establish a presence in Japan. This presence will
cost $10 million dollars which is equivalent of $1 billion yen. The company is looking to
obtain this amount in a form of a loan from the US markets with the goal of exchanging the
amount with a Japanese company who is looking to obtain US currency. By swapping loan
terms, these companies are able to achieve competitive rates and work together to limit
foreign exchange risk.